CARES Act Provides Unique Opportunities for 2020 Charitable Giving
The near doubling of the standard deduction under the Tax Cuts and Jobs Act of 2017 (“TCJA”) wrought fears that charitable organizations would see declines in donations where there was no corresponding tax benefit for an itemized deduction. The Tax Foundation estimates that the TCJA cut households itemizing deductions by more than half. However, Giving USA found that Americans gave nearly $450B to charities in 2019, the second highest amount ever recorded when adjusted for inflation. It turns out we are a generous nation, after all.
Though the loss of itemized deductions did not deter the charitably inclined, the Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES Act”) provides particular incentive at a time when donations could be critical for non-profit organizations in our country. There are two tax benefits under the CARES Act that benefit charitable donors in 2020: a $300 deduction for non-itemizers and an elimination of the AGI cap for cash contributions.
$300 Above The Line Deduction
Standard deduction donors who give $300 in cash ($600 for joint filers) to a qualified organization will receive an above the line deduction for the donation in 2020. Because the deduction is not itemized, this is a direct reduction of AGI, and the full standard deduction remains available. If a donor itemizes deductions, this above the line savings is not available; all charitable deductions are still reported on Schedule A.
100% AGI Limit for Schedule A Charitable Deductions
Historically, charitable cash donations were limited to an itemized deduction of 50% of AGI. This limit was increased to 60% under the TCJA of 2017. However, for the year 2020 only, that limitation has been lifted entirely. Itemized charitable cash donations are deductible up to 100% of AGI in 2020. Theoretically, one could eliminate one’s entire AGI with charitable deductions and have zero federal income tax liability. The increased limit applies to cash donations only and is limited to public charities and certain foundations; the 100% limit does not apply to contributions to donor advised funds (DAFs).
The 100% contribution limit is elective. A separate election is available for each contribution. If the election is not made, the donation will be subject to the standard 60% limitation. Contributions in excess of 100% of AGI will carry forward for up to five years, while carryover contributions from years prior to 2020 remain limited to the cap under the prior law (50% or 60%).
While 2020 will be remembered as a terrible year for most of us, one bright spot provided by the CARES Act is the opportunity to maximize the benefit of charitable donations. We have written previously about tax incentivized vehicles for charitable giving, such as Qualified Charitable Distributions (QCDs) or DAFs. The 100% AGI limitation does not apply to these vehicles, as QCDs are not included in AGI anyway, and the DAFs are specifically excluded from the increased limit. However, planning opportunities abound with careful calculation and consultation with your tax professional.
As we have discussed in prior posts, the CARES Act suspends required minimum distributions from many retirement accounts, allowing account holders to opt out of these otherwise mandatory distributions. Opting out of one’s RMD may reap the benefit of a lower tax bracket for some taxpayers. For those who find that waiving the RMD does not decrease AGI enough to lower the bracket, use of the 100% AGI limitation could further reduce income in the lower tax brackets, and provide additional tax savings.
Another planning opportunity in waiving RMD is the Roth conversion. Combining a Roth conversion with a sizeable charitable contribution subject to the 100% limit could offset some or all of the tax liability incurred by the conversion.
Again, the 100% limit is only for cash donations to a public charity and certain foundations. The higher limit is not available for donations of appreciated stock. However, investors sitting on losses from recent market volatility might consider selling off those losses to create cash for a charitable donation, receiving the double benefit of the write-off on the loss and the charitable deduction.
If you have the inclination and ability to make a significant contribution to a charity, this is the year to do it. With careful planning in conjunction with your tax professional, unique tax savings abound for 2020. Perhaps this is one small, but nonetheless important, thing to be grateful for in an otherwise challenging year.